Burnished by Starbucks, upstart Square battles payment giants

SAN FRANCISCO (Reuters) - Two years ago, employees from the start-up Square Inc descended on farmers markets in San Francisco to hand out a new type of credit-card reader that let small, independent merchants accept plastic via their smartphones or tablets.

But this month, when Starbucks Inc and Square announced that 7,000 coffee shops across the country would begin accepting payment through Square's smartphone app, the small white cubes that were Square's original calling card didn't merit a mention.

The subtle shift in Square's business focus, from card readers to nifty software, comes as one of Silicon Valley's most highly-touted startups encounters the brutal realities of the arcane but lucrative electronic payments business.

Now on track to process $10 billion in payments a year, Square has attracted a furious response from established or deep-pocketed rivals who are determined to crush the San Francisco-based upstart.

In recent months, eBay Inc's PayPal and Intuit have both released their own card readers, while retail giants including Wal-Mart and Target have announced a joint venture to develop their own mobile payment offering. Visa Inc and AT&T also boast of their own projects as does Google Inc, which continues to put muscle behind its Google Wallet product.

Square must now show that it can compete not just for food trucks and taxi drivers, but for large brick-and-mortar businesses and chain stores too.

"Our path is to have every single business in the U.S. use Square," said Keith Rabois, chief operating officer and a former PayPal executive who heads Square's day-to-day operations. "It won't happen tomorrow, but it will happen."

The bold talk belies the many hurdles facing the company, which is valued at $3.5 billion by private investors. Square makes money by taking a 2.75 percent cut for every transaction it processes. But more than half of that is immediately paid out to other companies, including the card's issuing bank, card networks like Visa, and also JP Morgan Chase Paymentech, which manages funds on Square's behalf.
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